Germany Tries to Catch Up with Startup World

Left BehindGermany's Race to Catch Up in the Startup World

Although it is a business powerhouse, Germany's economy is dominated by pre-internet companies. Now the country is realizing that if it wants to remain strong, it needs to create the next Google -- and reinvent the way its entrepreneurs work.

Nikolai Ensslen and Andrija Feher aren't much for false modesty. When the two students decided to start a company, they knew that they wanted it to be big -- really big. "The sky is the limit," says Ensslen today, seven years later.

And there's still room to grow. They recently moved their company, Synapticon, and its 45 employees to new headquarters in a nondescript building in Schönaich outside Stuttgart. There, they develop intelligent control systems for robots. Their goal, Ensslen and Feher say, is to make "Synapticon inside" as self-evident for robotics as "Intel inside" is for computers.

Are these delusions of grandeur? Or is this precisely the entrepreneurial spirit Germany urgently needs?

A long time ago, Robert Bosch and Gottlieb Daimler founded companies in the Schönaich region that still shape the country and its people. University students in Stuttgart often aspire to safe jobs at Daimler or Bosch or with one of the many "hidden champions," the small and medium-sized machine-building companies that dominate the world market in their particular niches. But what you won't find here are new world market leaders. And yet they are urgently needed.

"We Germans were once very good at starting companies, but that was 150 years ago," says 33-year-old Ensslen. The country is "underdeveloped when it comes to software," adds Feher, his partner, noting that Germany's success came at the wrong time, and that success makes you complacent.

Dietmar Harhoff agrees, though he doesn't believe that this passion for founding companies disappeared so long ago. "We forgot the willingness and ability to be independent sometime after the Grundig-Nixdorf generation," says Harhoff, director of the Max-Planck Institute for Innovation and Competition in Munich. He is referring to Germany's postwar economic miracle, a period that produced Max Grundig, who founded a successful electronics company, and computer pioneer Heinz Nixdorf.

Although the German economy remains strong, it is living off the success of its past. Its strength lies in its constant ability to improve products and technologies, to build the best cars and the best machines. For a long time, this has allowed it to conceal the fact that it lacks a fundamental trait: innovative strength, or the ability to create entirely new things, new technologies, new products and new business models.

Innovations rarely emerge from large corporations with hierarchical structures, where everyone plays it safe. Innovations require space -- and courage. That's why they thrive most in young companies which have little to lose but everything to gain, and in regions that offer them the right ecosystem to encourage their growth -- along with a lot of capital.

In the United States, giants like Apple and Microsoft came into being in the 1970s, and Google, Facebook and Amazon, companies that are now among the world's largest and most valuable businesses, emerged around the turn of the millennium. They have an astounding combined value of €2.5 trillion ($2.7 trillion), far more than the total value of all publicly traded companies in Germany.

The DAX, the stock index of Germany's 30 most important companies, consists mainly of corporations founded before World War II or even World War I -- giants like Bayer, Siemens, Daimler and Allianz. Software manufacturer SAP is the only German company from the new industrial age that is a global leader.

This does not bode well for the future of the German economy. Data-driven internet companies threaten the country's traditional business models, but Germany has hardly any players in promising high-tech industries.

"In the last few decades, we have simply missed out on all major technology trends," says investor Frank Thelen. "Search engines, mobile internet, online video, social media -- it's all in American hands. It's time we finally created something in Germany again that has worldwide relevance."

Thelen, known to viewers as a juror in the German version of the TV show "The Lion's Den," a sort of casting show for startup entrepreneurs, is a pioneer of the German startup scene. He has had a hand in companies that have become spectacular successes and in one spectacular bankruptcy. He is currently pinning his greatest hopes on a young Bavarian company, Lilium Aviation, which is developing an electric air taxi that can take off vertically. "At first we thought they were crazy," says Thelen, who is 41. "But the startup team is incredibly strong, and my technology expert has told me: It will fly."

No one knows if Synapticon will capture the market in robotics, or if Lilium Aviation will fundamentally change aviation, but what's important is that they are trying, and that other young entrepreneurs in the country are also taking bold steps. Unless it experiences a new era of creative business innovation, Germany will lose its role as an important industrialized nation.

There has been some undeniable progress in recent years. According to estimates by the German Startup Association -- which is headquartered in Berlin -- about 6,000 startups, young companies that pursue an innovative business model and grow quickly, have emerged. Berlin is a natural choice for startups, and not just because it is the country's political capital: Young entrepreneurs have become an important economic and image factor for the city. An interesting startup community has also taken shape elsewhere in the country, especially in Munich. Regardless where in Germany, however, the scene is dominated by men, with women heading only 14 percent of startups.

The question will be whether all of this is enough, and what else needs to be done so that the German economy can truly rejuvenate itself from the bottom up.

Berlin: Startup Hotspot

The Factory in Berlin has become an important symbol for the capital's startup scene, the network of young Internet companies and investors that has developed in the city in recent years. There is, of course, a ping-pong table in the Factory, along with open coffee kitchen and a quiet room for midday naps. The walls are exposed brick, the chairs are by designer Charles Eames, and the young people sitting on them wear headphones and use MacBooks. In visual terms, the Factory is a cliché.

The building, located along the former border strip between East and West Berlin, was once a brewery. In 2011, a group of real estate developers began converting it into a campus for digital businesses. Companies like Soundcloud and Twitter rented space on the upper floors. The ground floor consists of a co-working space, a work area and gathering space for freelancers, startup founders and other members.

More and more companies in the "old economy" are seeking contact with startups, and the Factory addresses this demand. It enables established companies to become members, like in a club, and in return, they gain access to the campus, its events and its network. Deutsche Bank is a member, and so is automotive supplier Schaeffler. Factory Managing Director Udo Schloemer turns down any other inquiries, he says. "Sometimes managers call us and ask: Can I come and take a look? That's not an option. We are not a zoo." The point, he says, is that corporations interact with startups as equals.

"Everyone wants to make it big in Berlin," says 34-year-old Jan Beckers. He came to Berlin from the western German city of Münster in 2008 after completing a business degree with a clear goal in mind: "I wanted to be an Internet entrepreneur." At the time, he says, the community consisted of "no more than a hundred people," many of whom came to Berlin because it was the middle of the financial crisis, and they couldn't find jobs in consulting or investment banking. StudiVZ, a social network, was the star of this young community -- though it failed soon afterwards, beaten out by Facebook. Those years marked the beginnings of the Berlin ecosystem.

Since then, Beckers has developed about two dozen startups. He's what they call a serial entrepreneur. FinLeap, Becker's current project, incubates several ideas simultaneously, including an app that would make insurance brokers redundant, and a digital asset management system.

Because the business models are so complex, FinLeap is deliberately searching for experienced executives for its top jobs, says Beckers. He recently recruited a former board member from Arvato, a subsidiary of publishing house Bertelsmann. "You can't build a bank with someone fresh out of WHU," says Beckers.

Many graduates of WHU, an acronym for the private Otto Beisheim School of Management, are milling about in Berlin, partly because of Oliver Samwer. The entrepreneur systematically recruits graduates of his alma mater for junior positions at his publically traded company, Rocket Internet -- a startup factory that creates large numbers of new companies, mostly based on the business models of others.

The startup community has given a boost to the Berlin economy, which doesn't have much of an industrial base to rely upon. According to calculations by the Berlin Investment Bank, the digital economy contributed about eight percent to the city's GDP in 2016, more than the construction sector and almost as much as the industrial sector. About 77,000 people are employed full-time in Berlin's digital sector.

Zalando, Market Leader

A significant portion of them, about 5,000 people, work at one of online retailer Zalando's Berlin locations. Thirty-three-year-old Robert Gentz, a member of the company's management board, is sitting on the fourth floor of company headquarters, not far from the line that divides the Friedrichshain and Kreuzberg neighborhoods. He and his two fellow board members still work at a desk in an open-plan office. The building is surrounded by the construction for a 5,000-person Zalando campus that is scheduled for completion in the coming months.

Founded in 2008 by Gentz and fellow student David Schneider, Zalando has grown precipitously. The simple idea of selling shoes on the Internet has turned into a company with annual sales of €3.6 billion and solid profits.

Zalando has been listed on the MDax, the second league in the German stock market landscape, since 2015 and is currently worth more than Lufthansa. It is possible that Zalando will graduate to the blue-chip German Stock Index, or DAX, in the foreseeable future. If it did, it would be the first DAX company with its headquarters in Berlin -- and the first from the Internet era.

To continue growing and prevail against global competitors like Amazon, Gentz wants to transform Zalando from an online retailer into a technology platform to which various business models can be attached. In addition to selling items from its own warehouses, the company also has goods delivered directly by fashion labels and stores. A few weeks ago, Zalando acquired a Munich-based chain of athletic shoe stores. "The European fashion market is worth €400 billion in annual sales," says Gentz, "and we don't even have one percent of that."

Gentz says he has never been in cashing out by selling his shares and getting out of the company -- an approach he criticizes among many young entrepreneurs who try their luck in Berlin. "You still frequently hear people say: The main reason I want to establish a startup is to sell it. A company is not a short-term project. You have to love it, in good times and bad."

Yaron Valler is concerned about the Berlin ecosystem, however, and not just for the reason Gentz cites. The Israeli claims that it has lost its balance and is "dominated almost exclusively by businesspeople." From his office on Friedrichstraße, Valler manages Target Global, a venture capital fund worth more than $300 million. "A healthy startup community needs both," says Valler, "business ideas that shine because of excellent execution, and technological innovations."

Many startups in the capital still operate online shops or marketplaces, relatively simple business models that take a lot of capital to succeed. This could be a watershed year for many of them -- but it hasn't gotten off to a good start. In January, online auction house Auctionata declared bankruptcy. The stock price of the Samwers' Rocket Internet plunged in late February, after Kinnevik, a Swedish investment firm, sold half its shares. "Things will get difficult in Berlin," predicts Valler.

This makes it all the more important that a startup community develop elsewhere in Germany. Interesting approaches are generally found in places where universities, high-tech founders and industrial companies work together,